Elsevier

Energy Policy

Volume 91, April 2016, Pages 98-112
Energy Policy

Asset transformation and the challenges to servitize a utility business model

https://doi.org/10.1016/j.enpol.2015.12.046Get rights and content

Highlights

  • The paper analyses the expected transformation of utilities into service-providers.

  • Service and utility business models possess very different attributes.

  • The former is based on intangible, the latter on tangible assets.

  • The transformation into a service-provider is related with great challenges.

  • Asset transformation is proposed as a barrier for business model innovation.

Abstract

The traditional energy utility business model is under pressure, and energy services are expected to play an important role for the energy transition. Experts and scholars argue that utilities need to innovate their business models, and transform from commodity suppliers to service providers. The transition from a product-oriented, capital-intensive business model based on tangible assets, towards a service-oriented, expense-intensive business model based on intangible assets may present great managerial and organizational challenges. Little research exists about such transitions for capital-intensive commodity providers, and particularly energy utilities, where the challenges to servitize are expected to be greatest. This qualitative paper explores the barriers to servitization within selected Swiss and German utility companies through a series of interviews with utility managers. One of them is ‘asset transformation’, the shift from tangible to intangible assets as major input factor for the value proposition, which is proposed as a driver for the complexity of business model transitions. Managers need to carefully manage those challenges, and find ways to operate both new service and established utility business models aside. Policy makers can support the transition of utilities through more favorable regulatory frameworks for energy services, and by supporting the exchange of knowledge in the industry.

Introduction

Countries such as Germany and Switzerland aim to realize the low carbon energy transition by reducing the consumption of energy and increasing the share of renewable energies (BFE (Bundesamt für Energie), 2013, BMWi (Bundesministerium für Wirtschaft und Energie), 2015), which will fundamentally transform power markets (Richter, 2013a, Schleicher-Tappeser, 2012). European energy utility companies (EUCo) are facing serious threats to their established business model (e.g., Eurelectric, 2013). But they are also major stakeholders of the energy system, and thus are expected to “be at the core of the energy transition.” (Apajalahti et al., 2015: 76). By servitizing their business models, they could fulfill this crucial role (Apajalahti et al., 2015, Hannon et al., 2013, European Commission, 2011).

Thus, scholars and managers agree that utilities need to fundamentally innovate their business models (BMs) to overcome their role as commodity suppliers and become service providers for comprehensive energy solutions (Boston Consulting Group, 2011, Duncan, 2010, Klose et al., 2010, PWC, 2013, Richter, 2013a, Richter, 2013b, Schleicher-Tappeser, 2012, Schoettl and Lehmann-Ortega, 2011, Servatius, 2012).

Business model innovation (BMI) has been recognized as a vehicle for corporate transformation and a source for competitive advantage through the development of new ways of creating, delivering and capturing value (Chesbrough, 2010, Richter, 2013a, Schneider and Spieth, 2013, Teece, 2010; Zott et. al., 2011). Servitization represents a specific form of BMI (Maglio and Spohrer, 2013, Nair et al., 2013, Velamuri et al., 2013, Visnjic Kastalli and Van Looy, 2013). It requires the holistic innovation of an organization, wherein it shifts from selling products to selling services or product-service bundles (Baines et al., 2009).

However, BMI, and the servitization of firms, can create significant managerial challenges (Baines et al., 2009, Gebauer et al., 2005, Kindström, 2010). Despite the expected importance of services for utilities, scholars have paid little attention to the challenges of servitizing a utility BM. Scholars have described numerous market barriers related to energy service adaption, such as low energy costs, ambiguous or absent legislative framework, lack or mismatch of financing, perceived business and technical risks, mistrust among actors, and low information levels regarding energy services (Hannon et al., 2013, Marino et al., 2011, Suhonen and Okkonen, 2013, Vine, 2005). However, intra-organizational barriers for the servitization of utilities have been hardly addressed. One exception is Apajalahti et al. (2015), who argued that the unbundling of energy companies and the split of involved business units result in increased complexity for service offering. The literature on servitization indicates significant challenges, but is largely focused on the manufacturing sector, “where product and service differentiation are easily achieved” (Robinson et al., 2002: 164). In the context of capital-intensive1 commodity suppliers, such as electric utilities, even greater challenges can be expected (Robinson et al., 2002): literature on service and servitization highlights for instance the crucial importance of intangible input factors such as workforce, innovative capabilities, and customer orientation (e.g., Baines et al., 2009; Kindström, 2010). These factors have previously played a minor role in the utility sector. Instead, it has been characterized by high capital intensity (e.g., Kleindorfer and Wu, 2003) low personnel intensity (destatis (Statistisches Bundesamt), 2011), low innovation intensity (ZEW (Zentrum für Europäische Wirtschaftsforschung GmbH), 2015: 6) and a limited customer orientation, due to the low change rate of electricity customers, for instance in Germany (BDEW, 2014b).

Analyzing the difficulties of servitizing a utility BM requires a close look at each of the BM components, such as the value proposition, the customer interface, the infrastructure, and the revenue model (see Table 1) (Osterwalder, 2004, Osterwalder and Pigneur, 2010, Richter, 2013a), as well as the dynamics of their interactions, and the relationship between the status quo and the new BM (Demil and Lecocq, 2010, Zott et al., 2011). These relationships can foster or inhibit the transition; illuminating these relationships may enhance our knowledge on barriers of BMI and the role of the established BM. The research question is thus: What are the distinct attributes of utility and service-oriented BMs? What are the resulting inhibiting and fostering relationships affecting the transition?

First of all, the paper contributes to the discussion of managers and policy makers on the future of utilities, particularly in the context of energy services. It maps the major challenges and discusses implications for managers and policy makers. In particular, it highlights the significant challenges that utilities have to overcome to remain leading stakeholders in a more service-oriented energy landscape. Second, the paper contributes to the literature on BMI barriers, by proposing and introducing asset transformation as a novel concept. Asset transformation captures the change in underlying BM assets and their subsequent challenges, not adequately acknowledged by previous concepts. Therefore, it enhances knowledge on the difficulties of particular BM transitions. Third, this paper adds the case of servitizing a capital-intensive commodity BM to the manufacturing-oriented servitization literature.

The paper is organized as follows: Section 2 outlines the background, i.e. drivers for servitization in Germany and Switzerland, and introduces relevant literature and the analytical framework. Section 3 specifies the applied methodology. Section 4 displays the empirical findings. Section 5 discusses the results. Section 6 derives the conclusions, and the policy and managerial implications.

Section snippets

Research context: drivers for service-oriented BMI in the power sector

The low carbon energy transition is related to a number of drivers that drive utilities to servitize their BMs. First, many utilities in Europe face a severe crisis of their established BM. European utilities have lost more than half of their one trillion EUR company value since 2008, and stocks performed significantly worse than the market as a whole (MSCI, 2014, Eurelectric, 2013, The Economist, 2013, The Economist, 2013). Eurelectric (European Union of the Electricity Industry) concludes

Methodology

To analyze servitization in utilities, a qualitative and inductive research approach is reasonable in order to broaden the base of knowledge on the topic. Qualitative approaches allow for insights into complex organizational processes (Yin, 2009, Eisenhardt and Graebner, 2007). Analytic induction accommodates existing concepts and theories (Bansal and Roth, 2000, Manning, 1982). The research was conducted in Germany and the Switzerland, due to their commitment to the energy transition and the

Results

The core attributes of the utility and the service BM, as well as the inhibiting or fostering relationships, are depicted in Fig. 2 and explained in the following sections. They are substantiated by representative quotes in Tables 4 (BM attributes), 5 (fostering relationships) and 6 (inhibiting relationships).

Discussion

The following section discusses the three major challenges identified-the value dilemma, asset transformation and simultaneity challenge-against the backdrop of related literature and the contributions of interviewees.

Conclusions

This paper relates to a timely and crucial phenomenon in the context of the low carbon energy transition-the widespread belief that utilities need to servitize their BMs. Knowledge on servitization as a specific type of BMI has been enhanced by adding the case of the capital-intensive electric power sector. The interviews provided valuable insights into the transformation process of utilities, and the major barriers therein. The major challenges consist primarily of the value dilemma (the lack

Acknowledgments

The author would like to thank all the utility managers who participated in this study. Moreover, this study benefited from the feedback received from participants of the 14th IAEE European Energy Conference in Rome 2014, and from valuable feedback from Nina Hampl, Gieri Hinnen, and Rolf Wüstenhagen and other scholars, for which the author is very grateful. Finally, the author would like to thank the Nagelschneider Foundation for the generous support of his research.

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